The European Central Bank will decide tonight whether to start buying Italian
debt to calm eurozone bond markets, while finance ministers from leading
economies hold emergency talks about how to limit the damage from the
current debt crisis.

Markets are hoping the central banks and world leaders will act decisively to halt the slide in global markets.

6:25PM BST 07 Aug 2011

Many fear that unless central banks and world leaders can agree co-ordinated action to avert a new global financial crisis before trading begins in Asia, global markets will continue to tumble.

Deputies from the Group of 20 advanced and emerging economies talked by telephone Sunday about proposals to minimize market shocks, South Korea's central bank said. Finance ministers from the Group of Seven economies planned talks before Asian markets open.

Standard & Poor's move to downgrade America's AAA credit rating to AA+ late on Friday is expected to weigh on shares. In a foretaste of what could happen, stock markets in the oil-rich Gulf states and Israel dropped on Sunday as the historic downgrade sent jitters across the region.

Last week stock markets around the world suffered their worst five-day run since the 2008 Lehman collapse, losing $2.5 trillion in value.

Michael Hewson, an analyst at CMC Markets, expects markets to fall further this week: "There's a lot of fear in the market ... People will sell now and ask questions later."

The European Central Bank are holding an emergency telephone conference on how to fend off financial collapse in Italy.

Jean-Claude Trichet, the ECB President, is said to want the policy-setting Governing Council to take a final decision on buying Italian paper after Prime Minister Silvio Berlusconi announced new measures on Friday to speed up deficit reduction and hasten economic reforms, Reuters reported citing a ECB source.

However, the council is split, with German members strongly opposed to such a move. Germany wants to see stiffer austerity programmes in place before the ECB shoulders more Italian and Spanish debt.

Support from Germany, as the paymaster of the euro project, is crucial to any deal. The divisions are one of the reasons that have made it difficult for eurozone leaders to come to any agreement on how to halt the debt crisis.

Der Spiegel, the German news magazine, reported on Sunday that the German government was increasingly doubtful that Italy could be rescued by the European emergency fund, even if it were tripled in size.

The country's debts are too large, Der Spiegel said, citing government experts. Italy's public debt is about €1.8 trillion, or 120pc of its national output.

Borrowing cost in Italy and Spain have been under pressure since the July 21 eurozone agreement on a second bailout for Greece did not extend to help for the two heavily indebted nations.

Last week yields on Italian and Spanish 10-year government bonds widened to 14-year highs above 6pc as markets continued to believe they would be the next victims of a debt crisis that has engulfed Greece, Ireland and Portugal.

This drove Jose Manuel Barroso, European Commission President to urge eurozone leaders - most of whom were on their summer holiday - in letter to respond by increasing the EU €440bn rescue fund and immediately ratifying the July 21 agreement.

Parliaments in eurozone nations are yet to vote on the deal.

Italy and Spain insist they can still meet debt payments, despite rising costs, but bond traders warned that current bond yields in the countries are unsustainable. The danger is that if the yields - or interest rates - increase it could weaken the European banking system further and lock Italy, the world's eighth largest economy, out of money markets.

Late last week the ECB relaunched its bond buying programme but markets were disappointed that this did not include Italian or Spainish government bonds and will be looking for more decisive action from the central bank.

The Bank of Korea, South Korea's central bank, said in a statement that that G-20 officials plan to continue to strengthen policy coordination to pursue a common response.

The statement, issued after a meeting of South Korean finance officials, also said the S&P downgrade had not changed South Korea's confidence regarding US Treasurys.

Meanwhile a Standard & Poor's official said on Sunday that there was a 1 in 3 chance that the US credit rating could be downgraded another notch if conditions erode over the next six to 24 months.

The credit rating agency's managing director, John Chambers, told ABC's This Week that if the fiscal position of the US deteriorates further, or if political gridlock tightens even more, a further downgrade is possible.

Japan's Senior Vice Finance Minister Fumihiko Igarashi hinted on Sunday that Tokyo would intervene again in the currency market if excessive fluctuations continue. It acted Thursday to weaken the yen and protect Japan's recovery from an earthquake and tsunami in March.

Former British Prime Minister Gordon Brown attacked the eurozone leaders on Sunday, saying had "thrown away" Europe's chance of a recovery by wrongly assuming that the continent's problems were confined to peripheral countries like Greece, Portugal and Ireland and could be dealt with by imposing austerity.